Cost consequences of offers to settle – When is the commencement of trial?

May 8, 2017

Offers to settle are ubiquitous in litigation. Nearly all cases settle before trial, but not all offers to settle attract the cost consequences of Rule 49.

Rule 49 offers have the potential to be more advantageous for the plaintiff than the defendant. Specifically, if the plaintiff makes an offer that is rejected and obtains judgment as favourable or more favourable than the terms of the offer, the plaintiff is entitled to partial indemnity costs up to the date of the offer and substantial indemnity costs after the date of the offer. Absent an offer (or a clear finding of reprehensible conduct by the defendant), a successful plaintiff would likely only receive partial indemnity costs throughout.

In contrast, if a defendant makes an offer to settle that is rejected and the plaintiff obtains judgment less favourable than the terms of the offer, the plaintiff is entitled to partial indemnity costs to the date the offer was served and the defendant is entitled to partial indemnity costs from that date onward. Absent these precise circumstances, there are no cost consequences to a defendant’s offer to settle.

In order for an offer to fall within the ambit of Rule 49, the offer must be made at least seven days before commencement of the hearing and must not be withdrawn or expire before the commencement of the hearing.

The Rule 49 requirement that an offer must stay open until after the commencement of trial was at issue in the recent Court of Appeal decision of Fonseca v. Hansen. The defendant in a motor vehicle accident case served an offer on the plaintiff for $1 million that was open until one minute after the commencement of trial. The plaintiff did not accept the offer and the trial commenced. However, a mistrial was declared after several days of evidence. At the second trial, the plaintiff recovered less than half a million dollars. In determining costs, the trial judge declined to consider the defendant’s offer in deciding the issue of costs because it did not remain open until the commencement of the second trial from which the less favourable judgment resulted. The Court of Appeal upheld the trial judge’s decision that “the fact that what was a trial when it started turned out to be no trial at all, does not revitalize or extend the offer because the circumstances intended for the duration of its availability had passed”.

Although this interpretation technically complies with Rule 49, it does seem somewhat unfair to the defendant, as the Court does not suggest what the defendant could have done to avoid this result. Certainly, they would not have expected at the time the offer expired that a mistrial was to result. The lesson from this case appears to be that counsel should be aware Rule 49 may work an injustice in circumstances outside the normal progression of an action.